Skip to main content

Take exposure to currency options only for speculation

What are currency options?

An options contract gives an investor the right — not obligatory — to buy or sell an asset at a pre-determined price and at a specified time. A call options gives the right to buy and a put options the right to sell. For instance, an option to buy dollars for rupees is a dollar call and rupee put.

Although there are two intermediaries — stock exchanges and banks — through which one can invest, a retail investor can only invest via an exchange. Banks cater only to those who have exposure in foreign currency such as exporters. The Reserve Bank of India (RBI) has introduced some plain vanilla options products with banks. But these are yet to take off.

How to invest?

While investing through exchanges, the minimum lot size is $1,000. At present, stock exchanges allow options in dollar-rupee only, whereas futures are allowed in dollar, pound, euro and yen.

To buy an options contract, you pay an upfront fee of two three per cent. Say, you plan to travel abroad after one month and need $1,000. You could buy one lot of $1,000 at the strike of 45. To make this purchase, you will have to pay a premium of 20 paise on the strike price. This implies you will be paying at the rate of `45.2 per dollar.

For this, you will have to enter into an options contract, pay an upfront/margin money of two-three per cent and the premium, which in this case is 20 paise. This works out to an initial investment of 1,1001,500 for an exposure of $1,000.

Now, if the rupee were to fall to 45.5, you stand to gain 30 paise. On the other hand, if the rupee were to appreciate to `44.5, you still stand to gain.

It is because although you lose the 20 paise premium per dollar, you can forego the contract and buy dollars from authorised dealers at a cheaper rate. The gain here is also 30 paise per dollar.

Many clients have hedged their positions with currency options for remitting funds to children studying abroad and for a foreign holiday for up to six months.

If one is looking at investing abroad, one could take advantage of this instrument. RBI allows an individual to invest up to $2 lakh in one year. As of now, very few retail investors understand this product and have such goals.

Not for retail investors

But financial planners are not too enthused with currency options as a form of investment. There is no need for retail investors to look at such products. If interested in speculation, one could look at keeping aside two-three per cent of the corpus for such investments. Importantly, don't link it to any goal.

This product does not give any special advantage such as high returns or tax benefits, therefore, it doesn't make sense to get into it. For a six-month horizon, fixed deposits and fixed maturity plans look attractive.

 

Popular posts from this blog

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now